EBV is considering a $10m Series A investment in Newco. Three structures are under consideration:
Structure A1: RP ($8m FV) + 10M shares of common;
Structure A2: CP ($10m FV and 2X liquidation preference) converting to 10m shares of common;
Structure A3: RP ($5m FV) + CP ($5m FV). The CP can convert to 10m shares of common.
The founders of Newco, who will continue with the firm, currently hold 10m shares of common stock. EBV has lifetime fees of 25% and carried interest of 20%.
Find the formulas for the partial valuation, GP valuation, and LP valuation for all three structures (A1, A2, and A3). Show all your work, including expiration diagrams and any necessary calculations of conversion conditions and carried-interest cutoffs.
What remaining information, if any, is necessary to make a choice between the three structures?
Assume that EBV chose structure A1. It is now one year later, and Talltree is considering a $20m Series B investment in Newco. Two structures are under consideration:
Structure B1: CP ($20m FV with 2X liquidation preference) converting to Z shares of common;
Structure B2: RP+CS ($20m FV), with 10m shares of common.
The founders of Newco, who will continue with the firm, still hold 10m shares of common stock. Talltree has lifetime fees of 25% and carried interest of 20% and that, in the event of an exit or liquidation, the Series B investors are redeemed first, followed by Series A.
c) Find the formulas for the partial valuation, GP valuation, and LP valuation for structures B1 and B2. How would you determine the level of Z for which Talltree is indifferent between the two structures. Show all your work, including expiration diagrams and any necessary calculations of conversion conditions and carried-interest cutoffs.